Presentations in Adelaide

Despite strenuous efforts, it’s hard to avoid air travel in my line of work, and I’ve been doing more than usual lately. One strategy I use to reduce travel is to bundle multiple commitments into a single trip and I’ve done this reasonably effectively with my latest visit to Adelaide. I presented a paper at the Australian Conference of Economists, a public lecture for the Don Dunstan Foundation and an assessment of the economic outlook for the ACE Business Symposium as well as taking part in several meetings. (A couple of presentations are linked).

My presentations were mostly concerned with the financial crisis and its implications, but I also had meetings on water allocation in the Murray Darling Basin and on Internet access to public information and cultural assets such as image libraries. ???? ??????? 50 ???

There isnt one thing in JQs slides I disagree with. Rationalist – you havent lived long enough obviously. Yes – liberlaim has saturated our entire views – on the freedom of once government production, on unions to protect basic rights, on industrial relations, on financial prudential governance, on many things

But its all wrong. Its not the solution people like you or Terje or Andy have wishful dreams about. You wont get your small town America or Australia back through libertarianism. You will only get ot back through sensible regulation and regulation with teeth that are capable of tearing apart market power and tearing apart creeping monopolisation of industry. The government isnt your enemy, unless its a corrupt government (and yes they need just as much savage regulation to prevent corruption by government officials).

The market has shown itself to be totally inept at self regulation and some governments have shown themselves to be totally inept at foverning and implementing effective regulation.

But I cannot see libertarianism or lack of regulation as the savious. Its already proved itself an abject failure to the extent it has been tried.

Is there something wrong with the ACE hyperlink? I was interested in pursuing a couple of points you made on finance sector but got gibberish in my browser.

As a presentation it was enjoyable and provocative but I think you might have been unaware when you presented how dramatically different the line of the US conference participants was to yours.

Their main concern (as I saw it) was the expansion of socialism in the US and (to them) the illegitimate assumption by the Obama administration that the Keynesian fiscal multiplier differed from zero and was positive.

It amuses me that so many right thinkers now claim to be totally unaware exactly how close we came with the GFC to Great Depression II. Fortunately, we have learned since GD I, the Great Depression to end all Great Depressions, and that learning, with credit largely due to Keynes, had not been forgotten dispite all the fanciful nonsense of the last thirty years. Australia is not in the position it is in simply by chance. We are in this lucky position in the lucky country, in large part, because a relatively large stimulus package was implemented quickly and immediately came in hard. If you remember bank guarantees had to be given becaue of the panic; this did not happen in Australia in the 80s or 90s. The situation was serious and because something was done quickly, the panic wasn’t given time to stick. If people who are in a state of panic are reassured quickly enough then the panic can pass quickly. If that panic state is allowed to persist then it becomes increasingly hard to reverse. That is why, other stimulus packages around the world, which were not implemented as quickly as the one in Australia was, have been less effective.

On the topic of “Internet access to public information” (or potential public information) have many people seen the open courseware at places like the MIT? http://ocw.mit.edu/ For several years now, the MIT has been putting an increasing amount of the course material on this site and making it available to anyone interested. They now have 1900 courses available across a diverse range of disciplines. To some small extent they have been copied by some other institutions in the US and around the world, and more recently, public and course lectures from a variety of institutions have become available at UTube and through iTunes U. I really think this is an area that Australian tertiary education could get into, but the incentives for individual universities tends to be against it because provision via the internet could be significantly cheaper and could threaten traditional delivery. It would not, for example, provide a justification for an increasingly large and bureaucratic managerial class that has developed within universities, whose role appears to be to consume resources and delude themselves that they are contributing to the efficiency and effectiveness of the sector.

But back to internet provision… One discipline that seems ideal for this type of delivery is Mathematics, where success can be acheived by hard work by oneself and supplimented, as necessary, by tutoring either individually or as a member of a group. I suggest that provision of tertiary education through the internet is where a real education revolution could start in Australia. I wondered if anyone else has some thoughts on this?

It’s in the ppt format from Office 2007. If you do have that and are getting jibberish in your browser, you’ll need to ‘save as’.

If you only have an earlier Office version, you’ll need to beg JQ to supply a version in an earlier file format, or install Openoffice, or Microsoft’s compatability pack (which enables you to open 2007 documents in older Office installations).

Thank you, Alice, for reposting the ‘Dahlem Report’ (Ikonoclast had posted it in an earlier thread).

One of the contributors, Prof. Alan P. Kirman, was one of the two PhD supervisors of one of my two PhD supervisors (Michael C. Blad, ex University of Copenhagen, ex Syd. Uni). The critique in the Dahlem Report of how theoretical models in finance are taught and the critique of the micro-foundation of macroeconomics (eg representative agent) and the critique of ‘naïve market economics’, which ignores coordination failures, is the stuff I grew up with. I particularly like their statement on what Economics, as a discipline, is about. It is aimed straight at traditional micro-economic subjects. Prof. Ken Binmore is another great theoretician who doesn’t mince his words about what is wrong with the teaching of game theory couses at Universities.

Incidentally, I inherited Michael Blad’s library after his premature death in 1990. It includes a book on “Equilibrium Analysis”, joint by Alan P. Kirman and W. Hildenbrand. Kirman writes: “To Michael, This is a book about static equilibrium whist we have always been interested in dynamic disequilibrium! Ah well, next book!.” I mention this because there appears to be quite a bit of confusion outside mathematical economics (analytical economics may be a better term) about general equilibrium theory. For example, some people seem to be under the impression that anybody who has done work in this area necessarily believes this is how the world looks like or should look like. As a consequence of this misconception, education in this area is often rejected. But, as a consequence of this lack of education in this area, critique on the application of models in finance tends to come too late – after the disasters have happened.

I’d be surprised if our host, Prof Quiggin, would not concur with the Dahlem Report; the authors are mainstream after all, even though the public may not know them. But, this is my inference only.

Prof Quiggin’s presentation aims at a wider audience by reviewing what went on in the policy area in the past 20 to 30 years and marking the end of this era. It seems to me his work and its success in having influence is a precondition for getting the educational objectives in the Dahlem Report accepted. It’s a big ship to turn around – how many Faculties of Economics are left and how many have been replaced with ‘Faculties of Business and Economics’ (as if this name would make sense).

When I read it Ernestine, I thought you might like it because I had heard you quote references from some of the models they also cited.
I wonder how many are questioning also, instead of just accepting in economics faculties Ernestine…but alas my knowledge is not in the mathematics of it (and Im too old for that now)..but still, I think I can see there is not enough questioning of underlying assumptions going on in economics faculties (when only last week I noticed in one faculty, close to home, a presentation on “choices”… of something or other in markets’ implying the individual is the best decider –
( – why am I so suspicious of the emphasis on research employing this word?).

In my view – there is a real divergence in the field of economics between those who have the skills to develop models towards the pursuit of monetary rewards and those who work away at keeping to the more public spirited approach of the real economic problem of scarce resources and how best do we keep staying alive, using the resources available to us.
Some economists choose different paths like the enrichment of the few with their models, but they still want the recognition of the profession. Therein the problem. The field of economics itself its split over worthy objectives.

I find it worrying that you are putting down arbitrary conditions over what is “worthy” and what is not. What about an economist working for a pension fund? He gets good pay and bonus for making money, which is something you seem to disagree with, but he is making money for people’s retirements which is infinitely more applicable to the average man and woman on the street than talking about say, welfare economics, which will be read and possibly used by only a few dozen people.

A lack of questioning mind is very worrying whether in academia, government and in finance – whereever there is quantitative methods used to derive a suggested outcome. No one ever asked a serious question about the data quality, the assumptions used, and I know that governments across the world have decided on massive changes in tax and spending on models that were outdated.

Garard,because lots has changed in the job market since the early 1980s and 1990s.
The labour market has been subject to increasing casualisation and loss of work hours. There has not been the promised trickle down to jobs. Jobs are much scarcer since both those years you quote. This cannot continue as it has been progressing. At some point we need, once more to examine unemployment and underemployment for the latter is doing the job of masking the real values in the former. It cannot continue because it is unsustainable.

@SeanG
Sean – you have stated your opinions as to what is worthy. Clearly, the economist who makes money, making money for people’s pension funds is worthy. Useful yes, worthy yes, but Sean – these economists are pragmatic economists, not great economists. They are rewarded amply as individuals in the employment of the fund manager.
These are not the great economic minds, we need as a whole Sean, to deal with the aberrations in micro markets that threaten to disrupt macro markets. For every ten economist working for pension funds (or goldmans) there might be one or far less than one who will be remembered by the next geneation Sean.

We need the latter MUCH more than the former. The former will help pensioners and be able to pay their c hildren’s education. The latter will help mankind and will likely be less amply rewarded. The value of such people cannot be measured in the pay they receive from a pension fund Sean.

Economists should spend time in the private sector as well as then devoting some time to academic scholarship and government work. I think that way there is a good series of cross-skilling being developed but also giving people a different perspective on the economy.

An interesting presentation, especially the near-utopian outcomes from your suggestions. The idea that through government action we can move towards a zero carbon economy ignores the costs associated with that. Indeed, you failed to mention higher taxes except for the Tobin Tax, a tax that does nothing other than destroy cross-border capital flows, hurt companies and ultimately pass all the costs onto the end user.

I instinctively shy away from a utopian idea of the perfect political economy. Government directed investment does not necessarily mean that it is a benefit to overall society or the economy. I think you are indulging a bit!

Alice, what private sector economists have to deal with is the human factor, some academic economists wouldn’t know the real economy, more specifically the financial sector, if it jumped up and bit them on the arse. If empirical evidence doesn’t fit the theory chuck out the empirical evidence. What always seems to be forgotten about the General Theory is that it was chock full discussions on human behaviour.

Apologies to John but I think there are a few academic economists who have their head up their bum.

SeanG we can move to a zero carbon economy without taxes and with the cost of energy dropping each year. The calculations are simple to do and are based around the following facts.

The capital cost of a renewable energy plant is 80% of the cost of energy from the plant ( reference Infigen Energy http://www.abc.net.au/insidebusiness/content/2009/s2697649.htm)
The way we finance new investment is through equity or savings.
The way we finance buying old assets is through loans.
Equity investments require a much higher return on capital than is warranted by the risk of the investment because there are fewer savings than there are loans. That is, the demand is much greater than the supply and hence equity investment charges are very high. (e.g. For small low risk new companies it is twenty times the cost to get VC capital than to get a loan secured against a house even though the house capital today is higher risk)

This is all predicated on a constant revenue stream from renewable energy which at this moment is not an efficient power source. I am out of my depth talking about energy economics but if the wind producers hit a quiet patch then the energy utilities will have to seek sources of energy elsewhere. It comes down to securing long-term contracts and having the supply of energy sufficiently diversified over a large enough sources of supply to mitigate the risk that supply might be intermittent.

Energy sold today by Infigen has a margin of 80%. That is for each dollar of income they get 80 cents in profit so that sounds pretty efficient to me. With today’s technology a new wind farm will be repaid in less than 14 years – but a wind farm will have a life of 50 to 100 years – so they are good long term investments. However, today to finance the building of wind farms suppliers of funds require IRR of 20% or more which makes wind farms “uneconomic”.

The engineering of a network of power sources means you want some power sources that are continuous and some that are “on demand”. Hydro sources, geothermal are both “on demand”. It turns out that it costs less to build solar thermal stations with large molten salt heat storage, than without heat storage, so that thermal power stations will produce continuous energy. It turns out that smart grids with a percentage of our cars being electric and plugged in to the grid will supply all the peak we need so reducing the need to build peak capacity. (Cars are only used a small percentage of the day).

Large coal stations are a risk to the grid because we have to have backup for when they go down so our power system has a lot of excess capacity. Did you know that a percentage of the power generated from large power stations is fed into the ground because there is not enough demand in the evening. (Ever wondered why we have off peak pricing?)

Zero finance costs (which is what zero interest loans with repayments from income generated by the investment enables us to do) means that the cost of power from renewables is about 1 cent per kwh at the factory gate. Long term contracts will not be a worry as renewables are lower running cost and hence lower price than fossil burning plants.

To get to zero emissions Australia will have to invest in the order of 30 billion a year for ten years. That amount of investment will give rise to an extraordinary range of diverse energy sources.

The fundamental problem is that “cheap money” which is money created as loan money is NOT available to build new productive assets. The banking regulations and the taxation regulations forbid banks creating zero interest loans for assets that do not yet exist and so money to build new assets has to come from savings and believe me that money is very very expensive because the supply is way below the demand. This is because people prefer to gamble their savings on stock markets and real estate speculation than invest in new assets. They do this because it is easier to “evaluate” stock price trends than it is to work out if a non existent asset is going to make money.

The reason we do not allow zero interest loans is that if we let banks create them for any new asset we would soon have too much money and get inflation. Governments have to come into the equation and they have to control how much money is issued as zero interest loans. However, this is easy to automatically regulate because governments can limit the issue the right to zero interest loans for different purposes and allow the rights to be sold. If there is too many loans then the price of the right will drop towards zero. If there are too few the price of the right to take out a loan will increase. In other words we will have a true market where the price of the right to take out a loan can regulate the supply. This is a much superior way to regulate the money supply than the current system where the RBA sets interest rates to control demand.

If you are a person who believes in LESS regulation and in FREER money markets then zero interest loans is for you. Of course we have to be able to implement such systems and run them efficiently.

The capital cost to build a first system to issue rights to zero interest loans, handle sales of rights, issue loans, ensure compliance of the spending of the money on renewables, monitor the effect of the money on emissions, can be built for less than five million dollars. It could start limited operation within three months of a decision to build and be fully operational within twelve months handling 30 billion a year. The cost to run such a system would be much much less than current banking transaction costs. (I am not guaranteeing the price will be less but the cost will be).

@sdfc
sdfc – there are more than a few non academic economists working with the human factor (mostly advancing their own salaries in the process – ie their own human factor) who couldnt give a stuff about wider economic issues yet still have the arrogance and narcissism to want credit from the profession (so they and their mates organise journals that see their works published and are the source of neering derision for genuinely concerned economists – Ill suggest two Cochrane and Stiglitz – join the dots and work out which one is great sdfc). The “former” have their heads so far up other people’s….they wouldnt know or care about genuine academic economics concerns…

Id trust a genuine academic economist over one of these pretenders anyday, sdfc. No need to apologise to JQ, Sean. Apologise for the faithful foot servants to the mighty at the Chicago School.

A sad thing is that many ‘academic’ economists can have experience of the ‘real’ world, without it in anyway changing their adherence to palpably deficient theories. The LTCM experience didn’t seem to have much of an influence on the two nobel prize winners involved. Greenspan still doesn’t seem to have made too much of an adjustment to his model. The fault is not in [their] stars…

That said, there are many others who have and have had a more reality based approach. An important part of the approach is a willingness to change one’s mind when one finds that one is wrong, which was one of Keynes strengths.

You’re not making your point very well at all Alice by mentioning Cochrane, as he is one of those academics I was referring to.

As a case in point I have heard one academic economist say that the Aussie dollar has been forced higher because government borrowing had forced up interest rates. This is nice from a text book point of view but most of us working in the private sector namely the financial markets are aware that the rise in the Aussie is more due to increased confidence than any rise in interest rates driven by government borrowing. Rates have risen of course but again that is due to increased confidence that the global economy is on the mend.

A couple of Australian academics have recently used dodgy trend analysis to advance the view that the cash handouts hadn’t boosted retail spending, based again on theory rather than what the real data is actually telling us. Like I said a fair few of them of them (a fair view does not mean all) disregard the empirical evidence when it conflicts with theory. I’m not aware of any financial sector economist for instance that doubts the cash handouts boosted household consumption.

My apology to John was to make the point that my comment was not a personal attack, I thought that was obvious. Once again, mentioning the Chicago School does your defence of academia no favours.

Quite right. It is amazing the silly things one hears from ‘informed’ commentators. It is obvious that the recent improvement in the Australian dollar is due to increased confidence which means, that given Australia is a commodity linked currency, the currency will eventually be pushed up by the improved terms of trade. (Just as the Australian dollar was going up before the GFC.) Given that expectation, there is movement in anticipation. The problem can’t really be blamed on text books in this case but is more a result of an inability of some academics to be able to analyse a situtation and a general inability to think. Unfortunately, you see this deficiency is some reports released by Government agencies. I have now read enough of the draft executive remuneration report to say that I am even more disappointed in it than I had anticipated, and that says quite a lot.

@sdfc
You didnt specify sdfc – there are more than a few academics who wouldnt know the meaning of economics in terms of really addressing some of our now systemic problems sdfc. That doesnt mean the private sector isnt chock full of dimwits either that just run crap mathematics models because they produce what their bosses want..

I made part of this comment elsewhere but I may as well make it here. If you dont beleive me sign yourself in to the STATA users list (no dont!!! I did and in three weeks I had 491 emails in an email account I dont check often…poor wretched people all over the world who dont understand STATA, cant work it out, it doesnt explain, it causes all sorts of bizarre results for even simple studies, it couldnt be said to be user friendly (I will wait for the objections to flow) it doesnt like this language or that language and people think the harder the program to use the better it must be????

I gotta get myself of this user list for the hopelessly entangled before it fills my hard drive. So many of them are trying to solve ditzy little error messages generated by stats models already programmed for them. No wonder we cant find the way… lots of economists may as well all be tied to chairs, in a white padded room, with a column of numbers, staring down the tube of an electron microscope 24/7.

Talk about lost in technology. Keep them learning Stata for 30 years so they cant actually study anything else…….the perfect plot.